Estate Planning Isn’t Just For The Elderly

Happy, smiling couple in their sixties.

To UTMA or Not to UTMA?

By: Anthony J. Enea, Esq.

Whenever a child is born, many parents and grandparents begin the process of planning for that child’s education and other needs. Whether it be the child’s birthday, baptism, bar/bat mitzvah, communion or confirmation, these events present the opportunity to gift to the minor child. However, the issue that inevitably arises is whether a custodial account should be utilized to hold the monies gifted to the minor child.

Prior to January 1, 1997, parents and grandparents in New York could utilize an account governed by the Uniform Gift to Minors Act (“UGMA”). An UGMA account was a custodial account where a parent or grandparent could irrevocably gift for the benefit of a minor child (under the age of 18).

On January 1, 1997, UGMA was repealed in New York by the enactment of the Uniform Transfers to Minors Act (“UTMA”). UTMA also allowed any parent or grandparent to establish custodial accounts for a minor child (In New York, the age of Majority for all UTMA accounts is twenty-one (21) years of age, unless, the donor / transferor specifically stipulates to age eighteen (18) as the age of majority). In addition to parents and grandparents, any other adult may also make the transfer to a minor child and any adult or bank/trust company may act as the custodian of the account.

The title of the account in substance must state “John Smith (name of Custodian) as custodian for David Smith (the minor) under the New York Uniform Transfers to Minors Act.” The nomination may name one or more persons as substitute custodians in the event the first nominated custodian dies or is unable to serve.

Once a gift is made to an UTMA account the account is irrevocable. The funds deposited to the account cannot be returned to the donor/transferor who transferred the monies or assets (stocks, bonds, etc…). However, the Custodian may utilize the funds in the account for the use and benefit of the minor in any amount the Custodian considers advisable without Court order and without any regard to the duty or ability of the Custodian personally, or any other person to support the minor, and without regard to the minor’s property and income. During the time the custodial account is in existence the Custodian shall collect, hold, manage, invest and re-invest the custodial property in accordance with the standard of care that would be observed by a prudent person dealing with the property of another. The Custodian must at all times keep the custodial property separate and distinct from all other property.

The use of a custodial account also results in the income tax liability on any interest and dividends being taxed to the child who, in most cases, is in a lower tax bracket then the custodian parent and/or grandparent.

The minor child has no access or control over the property/monies in the custodial account until he or she reaches the age of twenty-one (21) years. Once the minor reaches the age of 21 the monies/assets in the custodial account must be turned over to the child. It is the minor child turning twenty-one (21) years of age that resulted in the phrase “UTMA Regret” being coined. Sadly, all too often a significant number of twenty-one (21) year olds do not have the maturity or financial acumen to take control over and manage a significant amount of money. In addition, there are many potential problems that arise during a child’s life that are unforeseen at the time the funds are gifted to an UTMA Account. For example, the child may be diagnosed with a developmental and/or learning disability or the child may have troubles with the law and/or develop a drug and/or alcohol addiction. If these types of circumstances arise, the funds gifted to the minor will still become available to the minor at age 21, and may hinder either state or federal aid that would otherwise be available to a disabled individual or unfortunately, will allow for available funds to further a drug or alcohol addiction. Even if the child does not have a serious developmental disability and/or addiction, the mere fact that he or she could be financially irresponsible and squander the money and assets in the UTMA account is a possibility.

It is, in my opinion, the unforeseen and unpredictable nature of life that makes an UTMA account a poor choice for most parents and/or grandparents. While a parent and/or grandparent can always encourage a child or grandchild not to take the money at age twenty-one (21) and to instead transfer the funds to a Trust account for the child’s benefit, this is not always an available back-up plan, especially where the twenty-one year old does not wish to transfer the assets to a trust. The trust would be for the child’s benefit with his or her parents as the trustees and would provide for the trust to terminate at an agreed upon age, other than twenty one. This trust would allow the funds to continue to be available for the child’s benefit, but eliminates the heightened risk of financial irresponsibility if the funds were to stay in the child’s name alone. While I have seen several children with large UTMA accounts agree to transfer their funds to a trust, whether or not a child or grandchild will agree is a significant risk posed by an UTMA account. The temptation may be too great for some children.

A much more prudent option that will eliminate the uncertainty as to how responsible a twenty-one year old will be is to create a trust for one’s minor children and/or grandchildren that holds the monies one would otherwise gift to an UTMA account. The trust could have as many beneficiaries as the creator/grantor desires and could have provisions as to the use of the Trust principal and/or income for the benefit of the child and/or grandchild that is fashioned in accordance with the wishes of the grantor/creator of the Trust. Most importantly, the Trust can continue until the child and/or grandchild attains a specified age or for the life of the child and/or grandchild.

The Trust can also provide that if the child/grandchild is a person with special needs and/or developmentally or physically disabled, that his or her share of the trust principal and income be held in a Special Needs or Supplemental Needs Trust for his or her benefit. This would allow the child and/or grandchild with special needs to receive any federal and/or state benefits he or she is entitled to (i.e., Medicaid, Supplemental Social Security Income) without the trust principal and/or income affecting his or her eligibility for the aforementioned benefits.

An additional advantage of the Trust is creditor protection benefits for the trust beneficiary during the period of time the trust is in existence because the beneficiary does not have access and/or control over the trust assets. The trust will also prevent the beneficiary with financial problems and/or a substance abuse issue from squandering the monies intended for his or her education and future. Additionally, the beneficiary who may experience marital problems and/or divorce will also be protected by the use of a trust.

The grantors/creators of the trust can still take advantage of the “personal exclusion” for gift tax purposes by gifting $14,000 or less per year for each beneficiary (a husband and wife can gift up to $28,000 per year, per beneficiary) without having any gift tax consequences and without utilizing any portion of their lifetime estate and gift tax credit of $5,490,000 per person. If the trust utilized is Irrevocable, the trust income and/or dividends will be taxed to the beneficiary of the trust whose income tax rate should be lower than the Grantor/Creator of the Trust.

In conclusion, the use of a Trust for the benefit of a child or grandchild although more expensive than opening an UTMA account, has significant advantages and protections that are not available when one utilizes an UTMA account. In my opinion, the answer to the question “to UTMA or not to UTMA?” is to not UTMA.

Enea, Scanlan & Sirignano, LLP